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Supreme Court Requires De Novo Review of Punitive Damages Awards

Article

The Employment and Labor Law Alert

July 3, 2001

A recent decision of the United States Supreme Court confirms that a district court’s determination regarding the constitutionality of a punitive damages award is subject to a de novo review by the courts of appeals. In Cooper Industries, Inc. v. Leatherman Tools Group, Inc., 121 S.Ct. 1678 (2001), a jury awarded the plaintiff, Leatherman Tools Group, Inc., $50,000 in compensatory damages and $4.5 million in punitive damages on an unfair competition claim. The defendant, Cooper Industries, Inc., argued before the District Court that the punitive damage award violated its due process rights under the Constitution because it was grossly excessive. The District Court rejected Cooper’s argument and the Ninth Circuit Court of Appeals, applying an abuse of discretion standard, affirmed.

On appeal, the Supreme Court considered whether the Ninth Circuit had applied the appropriate standard of review. Initially, the Court noted that punitive damages, which are ?quasi-criminal,? are intended to punish the wrongdoer’s reprehensible conduct. According to the Court, State legislatures are given broad discretion in enacting statutes authorizing or limiting punitive damages awards. When a district court reviews a jury award of punitive damages, it ordinarily looks to whether the award is in line with the legislatively-created parameters. Under these circumstances, the district court’s review is subject to an abuse of discretion standard. However, when the party against whom punitive damages have been imposed has raised a constitutional challenge and the district court has rendered a decision regarding the constitutional question, the Court’s decision in Cooper now mandates that a de novo standard of review, and not an abuse of discretion standard, be applied by the courts of appeals.

According to the Court, punitive damages awards implicate the Due Process Clause of the Fourteenth Amendment, which prohibits a State from imposing grossly excessive punishments on tortfeasors. A district court faced with a constitutional challenge must determine the appropriateness of the award utilizing the standards enunciated by the Supreme Court in its decision in BMW of North America, Inc. v. Gore, 116 S.Ct. 1589 (1996), in which the Court found that excessive punitive damages awards may violate the Constitution, and its progeny. These factors include: (1) the degree of the defendant’s reprehensibility or culpability, (2) the relationship between the penalty and the harm to the victim caused by the defendant’s actions, and (3) the sanctions imposed in other cases for comparable misconduct. The Court observed that in cases in which these criteria have been applied, an independent examination was undertaken by the reviewing court.

Despite Cooper’s arguments to the contrary, the Court found that punitive damages awards are not the result of factual determinations by a jury. As a result, a district court’s determination that a punitive damages award comports with due process should not be subject to the typical abuse of discretion standard. Moreover, the Court found that application of the de novo standard does not violate the Seventh Amendment, which controls both the allocation of trial functions between judge and jury and the allocation of authority to review verdicts.

The Court equated the punitive damages determination to other areas in which a de novo standard of review has been applied, such as a district court’s determination of reasonable suspicion or probable cause in the criminal context. The Court reasoned that the ?grossly excessive? concept used to review punitive damages awards, like the concepts of probable cause and reasonable suspicion, is ?fluid? and requires a case-by-case evaluation of the underlying conduct, making independent review necessary.

To ensure application of the de novo standard of review by an appellate court, employers should make certain that their challenges to punitive damages awards are couched in terms of constitutionality, in addition to any challenges that may be warranted under applicable State laws. The Cooper decision and the heightened standard of review it mandates is unavailable to an employer who has failed to raise such a constitutional challenge.